FINANCIAL STATEMENTS AND NOTES CONTENTS

Transcription

1 FINANCIAL STATEMENTS AND NOTES CONTENTS GROUP FINANCIAL STATEMENTS Independent Auditors Report to the Members of Imperial Brands PLC 75 Consolidated Income Statement 80 Consolidated Statement of Comprehensive Income 81 Consolidated Balance Sheet 82 Consolidated Statement of Changes in Equity 83 Consolidated Cash Flow Statement 84 NOTES TO THE FINANCIAL STATEMENTS 1 Accounting Policies 85 2 Critical Accounting Estimates and Judgements 89 3 Segment Information 90 4 Profit Before Tax 92 5 Restructuring Costs 92 6 Directors and Employees 92 7 Net Finance Costs and Reconciliation to Adjusted Net Finance Costs 93 8 Taxation 93 9 Dividends Earnings Per Share Intangible Assets Property, Plant and Equipment Joint Ventures Inventories Trade and Other Receivables Cash and Cash Equivalents Trade and Other Payables Borrowings Financial Risk Factors Derivative Financial Instruments Deferred Tax Assets and Liabilities Retirement Benefit Schemes Provisions Share Capital Share Schemes Treasury Shares Commitments Legal Proceedings Acquisitions Net Debt Reconciliation of Cash Flow to Movement in Net Debt Changes in Non-Controlling Interests Related Undertakings 119 PARENT COMPANY FINANCIAL STATEMENTS Independent Auditors Report to the Members of Imperial Brands PLC 120 Imperial Brands PLC Balance Sheet 122 Imperial Brands PLC Statement of changes in equity 122 Notes to the Financial Statements of Imperial Brands PLC 123 Related Undertakings 126 Shareholder Information Imperial Brands Annual Report and Accounts 2016

2 INDEPENDENT AUDITORS REPORT TO THE MEMBERS OF IMPERIAL BRANDS PLC REPORT ON THE GROUP FINANCIAL STATEMENTS OUR OPINION In our opinion, Imperial Brands PLC s group financial statements (the financial statements): give a true and fair view of the state of the Group s affairs as at 30 September 2016 and of its profit and cash flows for the year then ended; have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union; and have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the IAS Regulation. WHAT WE HAVE AUDITED The financial statements, included within the Annual Report and Accounts (the Annual Report), comprise: The Consolidated Balance Sheet as at 30 September 2016; The Consolidated Income Statement and Consolidated Statement of Comprehensive Income for the year then ended; The Consolidated Cash Flow Statement for the year then ended; The Consolidated Statement of Changes in Equity for the year then ended; and The notes to the financial statements, which include a summary of significant accounting policies and other explanatory information. Certain required disclosures have been presented elsewhere in the Annual Report, rather than in the notes to the financial statements. These are cross-referenced from the financial statements and are identified as audited. The financial reporting framework that has been applied in the preparation of the financial statements is IFRSs as adopted by the European Union, and applicable law. OUR AUDIT APPROACH Context The context for our audit was set by Imperial Brands PLC s major activities in The principal development which affected our audit was the full year impact of the prior year acquisition in the USA, as a result of which we consolidated our component team in the USA into a single location. Overview AUDIT SCOPE MATERIALITY Overall group materiality: 123 million which represents approximately 4 per cent of adjusted group profit before taxation. Following our assessment of the risk of material misstatement we selected 22 reporting entities for full scope audits which represent the principal business units. We conducted full scope audit work at 22 of these reporting entities which included significant operations in the UK, Germany, Netherlands, Spain, USA, Australia, France and five other locations. We also conducted specific audit procedures in Russia. In addition certain central reporting entities and group functions, including those covering treasury, taxation and retirement benefits, and the Parent Company were subject to a full scope audit. OVERVIEW STRATEGY PERFORMANCE GOVERNANCE FINANCIALS AREAS OF FOCUS Goodwill and intangible assets impairment assessment. Accounting for restructuring provisions. Tax accounting and the level of tax provisions held against risks. The scope of our audit and our areas of focus We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) (ISAs (UK & Ireland)). We designed our audit by determining materiality and assessing the risks of material misstatement in the financial statements. In particular, we looked at where the Directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits we also addressed the risk of management override of internal controls and fraud in revenue recognition, including evaluating whether there was evidence of bias by the Directors that represented a risk of material misstatement due to fraud. The risks of material misstatement that had the greatest effect on our audit, including the allocation of our resources and effort, are identified as areas of focus in the table below. We have also set out how we tailored our audit to address these specific areas in order to provide an opinion on the financial statements as a whole, and any comments we make on the results of our procedures should be read in this context. This is not a complete list of all risks identified by our audit. 75

3 INDEPENDENT AUDITORS REPORT TO THE MEMBERS OF IMPERIAL BRANDS PLC CONTINUED AREA OF FOCUS Goodwill and intangible assets impairment assessment We focused on this area because the determination of whether elements of goodwill and intangible assets are impaired involves complex and subjective judgements by the Directors about the future results of the relevant parts of the business. At 30 September 2016 the Group had 12,098m of goodwill and 594m of intangible assets with indefinite lives and reasonable headroom in the majority of the Group s groupings of cash generating units (CGU s). We focused on the valuation of the Growth Markets reporting segment ( 2,269m of goodwill and intangible assets with indefinite lives). Growth Markets is made up of a number of operating segments and individual CGU s, including the Drive Growth CGU grouping and the Other Premium Cigar CGU grouping. For both of these goodwill is analysed separately and management s assessment indicated low headroom ( 210m and 100m respectively). For the Drive Growth CGU grouping we focused on the valuation of both the Russian and Italian businesses, which represent the most material parts of this CGU grouping. In particular we considered the robustness of short term growth included in the impairment models, together with discount rates and long term growth rates. For the Other Premium Cigar CGU grouping the valuation is dependent on continuing steady profit growth. As such we focused on the assumptions the Directors made about the growth rates in the context of constraints which could reasonably impact their ability to meet forecast. Accounting for restructuring provisions The group has continued in its significant multi-year cost optimisation programme including factory closures, organisational rationalisation and the establishment of shared service centres. The group also continues to integrate its US businesses. Management has indicated they expect these programmes will require several years to complete. In 2016 the charge in the Consolidated Income Statement relating to these programmes was 307m and there is a total restructuring provision held on the Consolidated Balance Sheet of 304m. The restructuring charge is separately identified on the face of the income statement and excluded from the non-gaap earnings measure Adjusted Operating Profit. The recognition of restructuring costs requires judgement to estimate the value and timing of net economic outflows and the extent to which the Group is externally committed. The presentation in the financial statements also requires consideration of whether the amounts included in the charge are fair and whether their separate presentation is helpful in understanding financial performance. HOW OUR AUDIT ADDRESSED THE AREA OF FOCUS We challenged the Directors analysis around the key drivers of the cash flow forecasts including the ability to achieve sustained price increases, market size and market share. We also evaluated the appropriateness of the key assumptions including discount rates, short-term and long-term growth rates and performed sensitivities across the reporting segments. For the Russian and Italian businesses we considered the impact of investment in marketing programmes over the medium-term forecast, together with the broader potential to grow profits in the longer term. We also considered the impact of current and expected legislative and duty changes on the business and considered the accuracy of management s current year forecasts. For the Other Premium Cigar CGU, we evaluated the reasonableness of the Directors forecast by challenging key assumptions about growth strategies including supply constraints, regulatory changes in key markets, opportunities in new markets and changes in the relationship between the USA and Cuba. We also considered the accuracy of management s current year forecasts. As a result of our work we determined that the judgement by management that no impairment was required in respect of Drive Growth and Other Premium Cigar was reasonable. We note however that goodwill and intangibles held by these businesses remain sensitive to changes in key assumptions. In particular, for Drive Growth, a failure to achieve the growth objectives for planned market initiatives could give rise to an impairment. Given this management has disclosed relevant sensitivities (see note 11). The cost optimisation programme operates predominantly through a series of distinct projects incorporating centralised governance and project management supporting local execution. This process gives rise to a series of specific restructuring charges being booked either at head office level or in individual component businesses. We conducted audit testing through our group team on centrally held charges and through local testing of charges at component businesses. Because the total restructuring cost also included some costs incurred at business units not included in our full scope audits the Group team tested these on a sample basis. Using this approach we tested the valuation, accuracy and completeness of the individual restructuring costs. These primarily consisted of redundancies and related costs, consulting and professional fees and asset impairments. We found no material exceptions in our testing. The principal areas of judgement underlying this work related to: the estimation of uncertain liabilities and impairment losses, the extent to which costs incurred on projects were sufficiently distinct and incremental to warrant inclusion in the restructuring charge and, projects which did not fit readily into the major elements of the programme but were considered by management to be appropriate for inclusion within the overall restructuring charge. We challenged management over the basis for their judgements in these areas and determined that the amounts included in the charge were reasonable. We also considered the merits of separate disclosure of the restructuring charge and discussed this with management and the audit committee. We concurred with their conclusion that the extensive scale and cost of the programme, its duration over several years and the level of centralised group wide control and board focus, indicated that separate disclosure was acceptable. 76 Imperial Brands PLC Annual Report and Accounts

4 AREA OF FOCUS Tax accounting and the level of tax provisions held against risks There are a number of significant judgements involved in the determination of tax balances, specifically in relation to the recognition of tax losses and the assessment of deferred taxation liabilities in relation to the distribution of reserves held in overseas subsidiaries. The group also has a number of uncertain tax positions in relation to which management apply judgement in setting provisions. Given the number of judgements involved and the complexities of dealing with tax rules and regulations in numerous jurisdictions, this was an area of focus for us. HOW OUR AUDIT ADDRESSED THE AREA OF FOCUS In the calculation of deferred taxes, we assessed the adequacy of tax loss recognition and the level of provision established in relation to a number of uncertain tax positions primarily in Europe including the challenge from the French tax authorities in relation to Altadis Distribution France. We determined that the position adopted in the financial statements was reasonable based on our consideration of management s assessment of risks combined with their use of experts in support of their provision for uncertain tax outcomes. We also considered the reasonability of the tax losses recognised. We considered the overall clarity of disclosure in relation to tax provisioning and the discussion of contingent liabilities including Altadis Distribution France and a more general assessment of cross border transfer pricing and determined that they were fair and proportionate. How we tailored the audit scope We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the geographic structure of the Group, the accounting processes and controls, and the industry in which the Group operates. The group is structured along two business lines being Tobacco and Logistics. The group financial statements are a consolidation of 278 legal entities represented by 224 reporting entities, comprising the Group s operating businesses and centralised functions. The group s accounting process is structured around a local or regional finance function for each of the territories in which the Group operates. These functions maintain their own accounting records and controls and report to the head office finance team in Bristol through an integrated consolidation system. In our view, due to their significance and/or risk characteristics, 22 of the 224 reporting entities, including the Logistics sub-group, required an audit of their complete financial information and we used component auditors from other PwC network firms, and other firms operating under our instruction, who are familiar with the local laws and regulations in each of these territories to perform this audit work. We also conducted specific audit procedures in Russia based on our assessment of the risk of misstatement and the scale of operations at this business unit. Where the work was performed by component auditors, we determined the level of involvement we needed to have in the audit work at those functions to be able to conclude whether sufficient appropriate audit evidence had been obtained as a basis for our opinion on the Group financial statements as a whole. OVERVIEW STRATEGY PERFORMANCE GOVERNANCE FINANCIALS The group engagement team visits the component teams on a rotational basis. In the current year the Group team visited the USA, Morocco, Germany, Sweden and Greece, as well as in-scope UK reporting locations. Video conferences were held at least once with the component auditors and management of every in-scope reporting entity and those undertaking specific procedures to discuss the results of the work performed. In addition the Group engagement team reviewed working papers of the auditors of the more significant components. We also met the other auditors used on the logistics sub-group and reviewed their working papers during the year. The group consolidation, financial statement disclosures and a number of complex items were audited by the Group engagement team at the head office. These included derivative financial instruments, net investment hedge accounting, treasury, taxation and retirement benefits. The Parent Company was also subject to a full scope audit. Taken together, the reporting entities and group functions where we performed audit work accounted for approximately 82 per cent of group revenues and in excess of 90 per cent of both group profit before tax and group adjusted profit before tax. Materiality The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and on the financial statements as a whole. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: Overall group materiality How we determined it Rationale for benchmark applied Component materiality 123 million (2015: 115 million). Approximately 4 per cent of adjusted group profit before taxation. We believe that adjusted profit before tax is the primary measure used by shareholders and other users in assessing the performance of the Group, and that by excluding items it provides a clearer view on the performance of the underlying business. For each component in our audit scope, we allocated a materiality that is less than our overall group materiality. The range of materiality allocated across components was for each component in our audit scope, we allocated a materiality that was less than our overall group materiality. The range of materiality allocated across components was between 10 million and 40 million for the trading entities and 80 million for the financing and treasury entity. 77

5 INDEPENDENT AUDITORS REPORT TO THE MEMBERS OF IMPERIAL BRANDS PLC CONTINUED We agreed with the Audit Committee that we would report to them misstatements identified during our audit above 10 million (2015: 10 million) as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons. Going concern Under the Listing Rules we are required to review the Directors Statement, set out on page 19, in relation to going concern. We have nothing to report having performed our review. Under ISAs (UK & Ireland) we are required to report to you if we have anything material to add or to draw attention to in relation to the Directors Statement about whether they considered it appropriate to adopt the going concern basis in preparing the financial statements. We have nothing material to add or to draw attention to. As noted in the Directors Statement, the Directors have concluded that it is appropriate to adopt the going concern basis in preparing the financial statements. The going concern basis presumes that the Group has adequate resources to remain in operation, and that the Directors intend it to do so, for at least one year from the date the financial statements were signed. As part of our audit we have concluded that the Directors use of the going concern basis is appropriate. However, because not all future events or conditions can be predicted, these statements are not a guarantee as to the Group s ability to continue as a going concern. OTHER REQUIRED REPORTING CONSISTENCY OF OTHER INFORMATION Companies Act 2006 reporting In our opinion, the information given in the Strategic Report and the Directors Report for the financial year for which the financial statements are prepared is consistent with the financial statements. ISAs (UK & Ireland) reporting Under ISAs (UK & Ireland) we are required to report to you if, in our opinion: information in the Annual Report is: materially inconsistent with the information in the audited financial statements; or apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in the course of performing our audit; or otherwise misleading. the statement given by the Directors on page 33, in accordance with provision C.1.1 of the UK Corporate Governance Code (the Code ), that they consider the Annual Report taken as a whole to be fair, balanced and understandable and provides the information necessary for members to assess the Group s position and performance, business model and strategy is materially inconsistent with our knowledge of the Group acquired in the course of performing our audit. the section of the Annual Report on pages 39 to 43, as required by provision C.3.8 of the Code, describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee. We have no exceptions to report. We have no exceptions to report. We have no exceptions to report. THE DIRECTORS ASSESSMENT OF THE PROSPECTS OF THE GROUP AND OF THE PRINCIPAL RISKS THAT WOULD THREATEN THE SOLVENCY OR LIQUIDITY OF THE GROUP Under ISAs (UK & Ireland) we are required to report to you if we have anything material to add or to draw attention to in relation to: the Directors confirmation on page 32 of the Annual Report, in accordance with provision C.2.1 of the Code, that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity. the disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated. We have nothing material to add or to draw attention to. We have nothing material to add or to draw attention to. the Directors explanation on page 32 of the Annual Report, in accordance with provision C.2.2 of the Code, We have nothing as to how they have assessed the prospects of the Group, over what period they have done so and why they material to add or to consider that period to be appropriate, and their statement as to whether they have a reasonable expectation draw attention to. that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. Under the Listing Rules we are required to review the Directors statement that they have carried out a robust assessment of the principal risks facing the Group and the Directors statement in relation to the longer-term viability of the Group. Our review was substantially less in scope than an audit and only consisted of making inquiries and considering the Directors process supporting their statements; checking that the statements are in alignment with the relevant provisions of the Code; and considering whether the statements are consistent with the knowledge acquired by us in the course of performing our audit. We have nothing to report having performed our review. 78 Imperial Brands PLC Annual Report and Accounts

6 ADEQUACY OF INFORMATION AND EXPLANATIONS RECEIVED Under the Companies Act 2006 we are required to report to you if, in our opinion, we have not received all the information and explanations we require for our audit. We have no exceptions to report arising from this responsibility. DIRECTORS REMUNERATION Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of Directors remuneration specified by law are not made. We have no exceptions to report arising from this responsibility. CORPORATE GOVERNANCE STATEMENT Under the Listing Rules we are required to review the part of the Corporate Governance Statement relating to ten further provisions of the Code. We have nothing to report having performed our review. RESPONSIBILITIES FOR THE FINANCIAL STATEMENTS AND THE AUDIT OUR RESPONSIBILITIES AND THOSE OF THE DIRECTORS As explained more fully in the Statement of Directors Responsibilities, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and ISAs (UK & Ireland). Those standards require us to comply with the Auditing Practices Board s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the Parent Company s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. WHAT AN AUDIT OF FINANCIAL STATEMENTS INVOLVES An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. We primarily focus our work in these areas by assessing the Directors judgements against available evidence, forming our own judgements, and evaluating the disclosures in the financial statements. OVERVIEW STRATEGY PERFORMANCE GOVERNANCE FINANCIALS We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. OTHER MATTER We have reported separately on the Parent Company financial statements of Imperial Brands PLC for the year ended 30 September 2016 and on the information in the Directors Remuneration Report that is described as having been audited. John Maitland (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Bristol 8 November

7 CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 30 SEPTEMBER million unless otherwise indicated Notes Revenue 3 27,634 25,289 Duty and similar items (13,535) (12,585) Other cost of sales (8,143) (7,533) Cost of sales (21,678) (20,118) Gross profit 5,956 5,171 Distribution, advertising and selling costs (2,070) (1,857) Acquisition costs (40) Amortisation of acquired intangibles 11 (1,005) (697) Restructuring costs 5 (307) (328) Other expenses (345) (261) Administrative and other expenses (1,657) (1,326) Operating profit 3 2,229 1,988 Investment income Finance costs (1,984) (1,209) Net finance costs 7 (1,350) (261) Share of profit of investments accounted for using the equity method Profit before tax ,756 Tax 8 (238) (33) Profit for the year 669 1,723 Attributable to: Owners of the parent 631 1,691 Non-controlling interests Earnings per ordinary share (pence) Basic Diluted Imperial Brands PLC Annual Report and Accounts

8 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 SEPTEMBER million Notes Profit for the year 669 1,723 Other comprehensive income Exchange movements 1,260 (198) Items that may be reclassified to profit and loss 1,260 (198) Net actuarial losses on retirement benefits 22 (604) (28) Deferred tax relating to net actuarial losses on retirement benefits Items that will not be reclassified to profit and loss (489) (23) Other comprehensive income/(expense) for the year, net of tax 771 (221) Total comprehensive income for the year 1,440 1,502 Attributable to: Owners of the parent 1,336 1,489 Non-controlling interests Total comprehensive income for the year 1,440 1,502 RECONCILIATION FROM OPERATING PROFIT TO ADJUSTED OPERATING PROFIT million Notes Operating profit 2,229 1,988 Acquisition costs Amortisation of acquired intangibles 11 1, Restructuring costs Adjusted operating profit 3,541 3,053 RECONCILIATION FROM NET FINANCE COSTS TO ADJUSTED NET FINANCE COSTS million Notes Net finance costs (1,350) (261) Net fair value and exchange losses/(gains) on financial instruments (226) Post-employment benefits net financing cost Adjusted net finance costs (524) (467) OVERVIEW STRATEGY PERFORMANCE GOVERNANCE FINANCIALS 81

9 CONSOLIDATED BALANCE SHEET AT 30 SEPTEMBER million Notes Non-current assets Intangible assets 11 20,704 18,690 Property, plant and equipment 12 1,959 1,768 Investments accounted for using the equity method Retirement benefit assets Trade and other receivables Derivative financial instruments 20 1, Deferred tax assets ,195 22,666 Current assets Inventories 14 3,498 2,842 Trade and other receivables 15 2,671 2,454 Current tax assets Cash and cash equivalents 16 1,274 2,042 Derivative financial instruments ,534 7,468 Total assets 32,729 30,134 Current liabilities Borrowings 18 (1,544) (1,957) Derivative financial instruments 20 (118) (25) Trade and other payables 17 (7,991) (6,795) Current tax liabilities 8 (284) (167) Provisions 23 (188) (197) (10,125) (9,141) Non-current liabilities Borrowings 18 (12,394) (12,250) Derivative financial instruments 20 (1,646) (735) Trade and other payables 17 (17) (13) Deferred tax liabilities 21 (1,034) (1,170) Retirement benefit liabilities 22 (1,484) (909) Provisions 23 (287) (220) (16,862) (15,297) Total liabilities (26,987) (24,438) Net assets 5,742 5,696 Equity Share capital Share premium and capital redemption 5,836 5,836 Retained earnings (1,525) (315) Exchange translation reserve 896 (298) Equity attributable to owners of the parent 5,311 5,327 Non-controlling interests Total equity 5,742 5,696 The financial statements on pages 80 to 119 were approved by the Board of Directors on 8 November 2016 and signed on its behalf by: Mark Williamson Chairman Oliver Tant Director 82 Imperial Brands PLC Annual Report and Accounts

10 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 SEPTEMBER million Share capital Share premium and capital redemption Retained earnings Exchange translation reserve Equity attributable to owners of the parent Noncontrolling interests At 1 October ,836 (315) (298) 5, ,696 Profit for the year Exchange movements 1,194 1, ,260 Net actuarial losses on retirement benefits (604) (604) (604) Deferred tax relating to net actuarial losses on retirement benefits Other comprehensive income (489) 1, Total comprehensive income 142 1,194 1, ,440 Transactions with owners Cash from employees on maturity/exercise of share schemes Purchase of shares by Employee Share Ownership Trusts (7) (7) (7) Costs of employees services compensated by share schemes Current tax on share-based payments Dividends paid (1,386) (1,386) (42) (1,428) At 30 September ,836 (1,525) 896 5, ,742 At 1 October ,836 (756) (119) 5, ,463 Profit for the year 1,691 1, ,723 Exchange movements (179) (179) (19) (198) Net actuarial losses on retirement benefits (28) (28) (28) Deferred tax relating to net actuarial losses on retirement benefits Other comprehensive income (23) (179) (202) (19) (221) Total comprehensive income 1,668 (179) 1, ,502 Transactions with owners Cash from employees on maturity/exercise of share schemes Costs of employees services compensated by share schemes Current tax on share-based payments Dividends paid (1,259) (1,259) (42) (1,301) At 30 September ,836 (315) (298) 5, ,696 Total equity OVERVIEW STRATEGY PERFORMANCE GOVERNANCE FINANCIALS 83

11 CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 30 SEPTEMBER Cash flows from operating activities Operating profit 2,229 1,988 Dividends received from investments accounted for under the equity method Depreciation, amortisation and impairment 1, Loss/(profit) on disposal of property, plant and equipment and software 6 (2) Profit on disposal of intellectual property (31) Post-employment benefits (111) (50) Costs of employees services compensated by share schemes Movement in provisions 4 (67) Operating cash flows before movement in working capital 3,420 2,827 (Increase)/decrease in inventories (149) 21 Decrease in trade and other receivables Increase in trade and other payables Movement in working capital Tax paid (401) (408) Net cash generated from operating activities 3,157 2,747 Cash flows from investing activities Interest received 7 10 Purchase of property, plant and equipment (164) (194) Proceeds from sale of property, plant and equipment Proceeds from the sale of intellectual property 31 Purchase of intangible assets software (51) (44) Purchase of intangible assets intellectual property rights (14) Internally generated intellectual property rights (2) (16) Purchase of brands and operations (4,613) Net cash used in investing activities (182) (4,787) Cash flows from financing activities Interest paid (547) (459) Cash from employees on maturity/exercise of share schemes 9 7 Purchase of shares by Employee Share Ownership Trusts (7) Increase in borrowings 897 4,720 Repayment of borrowings (2,637) (380) Loan to joint ventures (9) Cash flows relating to derivative financial instruments (209) 139 Dividends paid to non-controlling interests (42) (42) Dividends paid to owners of the parent (1,386) (1,259) Net cash (used in)/generated from financing activities (3,931) 2,726 Net (decrease)/increase in cash and cash equivalents (956) 686 Cash and cash equivalents at start of year 2,042 1,413 Effect of foreign exchange rates on cash and cash equivalents 188 (57) Cash and cash equivalents at end of year 1,274 2, Imperial Brands PLC Annual Report and Accounts

12 NOTES TO THE FINANCIAL STATEMENTS 1 ACCOUNTING POLICIES BASIS OF PREPARATION The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and interpretations issued by the IFRS Interpretations Committee (IFRSIC) as published by the International Accounting Standards Board and adopted by the EU. In addition, the financial statements comply with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The financial statements have been prepared under the historical cost convention except where fair value measurement is required under IFRS as described below in the accounting policies on financial instruments. The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the period and of assets, liabilities and contingent liabilities at the balance sheet date. The key estimates and assumptions are set out in note 2 Critical Accounting Estimates and Judgements. Such estimates and assumptions are based on historical experience and various other factors that are believed to be reasonable in the circumstances and constitute management s best judgement at the date of the financial statements. In the future, actual experience may deviate from these estimates and assumptions. This could affect future financial statements as the original estimates and assumptions are modified, as appropriate, in the year in which the circumstances change. A summary of the more important accounting policies is set out below. BASIS OF CONSOLIDATION The consolidated financial statements comprise the results of Imperial Brands PLC (the Company) and its subsidiary undertakings, together with the Group s share of the results of its associates and joint arrangements. Subsidiaries are those entities controlled by the Group. Control exists when the Group is exposed to, or has the rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Where necessary, accounting policies of subsidiaries are changed to ensure consistency with the policies adopted by the Group. The acquisition method of accounting is used to account for the purchase of subsidiaries. The excess of the value transferred to the seller in return for control of the acquired business together with the fair value of any previously held equity interest in that business over the Group s share of the fair value of the identifiable net assets is recorded as goodwill. Intragroup transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless costs cannot be recovered. JOINT VENTURES The Group applies IFRS 11 to all joint arrangements. Under IFRS 11 investments in joint arrangements are classified as either joint operations or joint ventures depending on the contractual rights and obligations of each investor. The Group has assessed the nature of its joint arrangements and determined them to be joint ventures. The financial statements of joint ventures are included in the Group financial statements using the equity accounting method, with the Group s share of net assets included as a single line item entitled Investments accounted for using the equity method. In the same way, the Group s share of earnings is presented in the consolidated income statement below operating profit entitled Share of profit of investments accounted for using the equity method. FOREIGN CURRENCY Items included in the financial statements of each Group company are measured using the currency of the primary economic environment in which the company operates (the functional currency). The income and cash flow statements of Group companies using non-sterling functional currencies are translated to sterling (the Group s presentational currency) at average rates of exchange in each period. Assets and liabilities of these companies are translated at rates of exchange ruling at the balance sheet date. The differences between retained profits and losses translated at average and closing rates are taken to reserves, as are differences arising on the retranslation of the net assets at the beginning of the year. Transactions in currencies other than a company s functional currency are initially recorded at the exchange rate ruling at the date of the transaction. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at exchange rates ruling at the balance sheet date of monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated income statement with exchange differences arising on trading transactions being reported in operating profit, and those arising on financing transactions being reported in net finance costs unless as a result of net investment hedging they are reported in other comprehensive income. The Group designates as net investment hedges certain external borrowings and derivatives up to the value of the net assets of Group companies that use non-sterling functional currencies after deducting permanent intragroup loans. Gains or losses on these hedges that are regarded as highly effective are transferred to other comprehensive income, where they offset gains or losses on translation of the net investments that are recorded in equity, in the exchange translation reserve. REVENUE RECOGNITION For the Tobacco business, revenue comprises the invoiced value for the sale of goods and services net of sales taxes, rebates and discounts. Revenue from the sale of goods is recognised when a Group company has delivered products to the customer, the customer has accepted the products and collectability of the related receivables is reasonably assured. Sales of services, which include fees for distributing certain third party products, are recognised in the accounting period in which the services are rendered. For the Logistics business, revenue comprises the invoiced value for the sale of goods and services net of sales taxes, rebates and discounts when goods have been delivered or services provided. The Logistics business only recognises commission revenue on purchase and sale transactions in which it acts as a commission agent. Distribution and marketing commissions are included in revenue. Revenue is recognised on products on consignment when these are sold by the consignee. Customer rebates and discounts may be offered to promote sales. The calculated costs are accrued and accounted for as incurred and matched as a deduction from the associated revenues (i.e. excluded from revenues reported in the Group s consolidated income statement). OVERVIEW STRATEGY PERFORMANCE GOVERNANCE FINANCIALS 85

13 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 1 ACCOUNTING POLICIES CONTINUED DUTY AND SIMILAR ITEMS Duty and similar items includes duty and levies having the characteristics of duty. In countries where duty is a production tax, duty is included in revenue and in cost of sales in the consolidated income statement. Where duty is a sales tax, duty is excluded from revenue and cost of sales. Payments due in the USA under the Master Settlement Agreement are considered to be levies having the characteristics of duty and are treated as a production tax. TAXES Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustments to tax payable in respect of previous years. Management periodically evaluates positions taken in tax returns where the applicable tax regulation is subject to interpretation and establishes provisions on the basis of amounts expected to be paid to the tax authorities only where it is considered more likely than not that an amount will be paid or received. This test is applied to each individual uncertain position which is then measured on the single most likely outcome based on interpretation of legislation, management experience and professional advice. Deferred tax is provided in full on temporary differences between the carrying amount of assets and liabilities in the financial statements and the tax base, except if it arises from initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred tax is provided on temporary differences arising on investments in subsidiaries, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets are recognised only to the extent that it is probable that future taxable profits will be available against which the assets can be realised. Deferred tax is determined using the tax rates that have been enacted or substantively enacted at the balance sheet date, and are expected to apply when the deferred tax liability is settled or the deferred tax asset is realised. DIVIDENDS Final dividends are recognised as a liability in the period in which the dividends are approved by shareholders, whereas interim dividends are recognised in the period in which the dividends are paid. INTANGIBLE ASSETS GOODWILL Goodwill represents the excess of value transferred to the seller in return for control of the acquired business together with the fair value of any previously held equity interest in that business over the Group s share of the fair value of the identifiable net assets. Goodwill is tested at least annually for impairment and carried at cost less accumulated impairment losses. Any impairment is recognised immediately in the consolidated income statement and cannot be subsequently reversed. For the purpose of impairment testing, goodwill is allocated to groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose. INTANGIBLE ASSETS OTHER Other intangible assets are initially recognised in the consolidated balance sheet at historical cost unless they are acquired as part of a business combination, in which case they are initially recognised at fair value. They are shown in the balance sheet at historical cost or fair value (depending on how they are acquired) less accumulated amortisation and impairment. These assets consist mainly of acquired trademarks, intellectual property, concessions and rights, acquired customer relationships and computer software. The Davidoff cigarette trademark and some premium cigar trademarks are considered by the Directors to have indefinite lives based on the fact that they are established international brands with global potential. Trademarks with indefinite lives are not amortised but are reviewed annually for impairment. Intellectual property (including trademarks), supply agreements (including customer relationships) and computer software are amortised over their estimated useful lives as follows: Intellectual property 5 30 years straight line Supply agreements 3 15 years straight line Software 3 10 years straight line PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are shown in the consolidated balance sheet at historical cost or fair value (depending on how they are acquired), less accumulated depreciation and impairment. Costs incurred after initial recognition are included in the assets carrying amounts or recognised as a separate asset as appropriate only when it is probable that future economic benefits associated with them will flow to the Group and the cost of the item can be measured reliably. Land is not depreciated. Depreciation is provided on other property, plant and equipment so as to write down the initial cost of each asset to its residual value over its estimated useful life as follows: Property up to 50 years straight line Plant and equipment 2 20 years straight line/reducing balance Fixtures and motor vehicles 2 15 years straight line The assets residual values and useful lives are reviewed and, if appropriate, adjusted at each balance sheet date. FINANCIAL INSTRUMENTS AND HEDGING Financial assets and financial liabilities are recognised when the Group becomes a party to the contractual provisions of the relevant instrument. Financial assets are de-recognised when the rights to receive benefits have expired or been transferred, and the Group has transferred substantially all risks and rewards of ownership. Financial liabilities are de-recognised when the obligation is extinguished. Non-derivative financial assets are classified as loans and receivables. Receivables are initially recognised at fair value and are subsequently stated at amortised cost using the effective interest method, subject to reduction for allowances for estimated irrecoverable amounts. A provision for impairment of receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of those receivables. The amount of the provision is the difference between the asset s carrying amount and the present value of estimated future cash flows, and is recognised in the consolidated income statement. For interest-bearing assets, the carrying value includes accrued interest receivable. Non-derivative financial liabilities are initially recognised at fair value and are subsequently stated at amortised cost using the effective interest method. For borrowings, the carrying value includes accrued interest payable, as well as unamortised transaction costs. Cash and cash equivalents include cash in hand and deposits held on call, together with other short-term highly liquid investments. 86 Imperial Brands PLC Annual Report and Accounts

14 The Group transacts derivative financial instruments to manage the underlying exposure to foreign exchange and interest rate risks. The Group does not transact derivative financial instruments for trading purposes. Derivative financial instruments are initially recorded at fair value plus any directly attributable transaction costs. Derivative financial assets and liabilities are included in the consolidated balance sheet at fair value, and include accrued interest receivable and payable where relevant. However, as the Group has decided (as permitted under IAS 39) not to cash flow or fair value hedge account for its derivative financial instruments, changes in fair values are recognised in the consolidated income statement in the period in which they arise unless the derivative qualifies and has been designated as a net investment hedging instrument in which case the changes in fair values, attributable to foreign exchange, are recognised in other comprehensive income. Collateral transferred under the terms and conditions of credit support annex documents under International Swaps and Derivatives Association (ISDA) agreements in respect of certain derivatives are net-settled and are therefore netted off the carrying value of those derivatives in the consolidated balance sheet. INVENTORIES Inventories are stated at the lower of cost and net realisable value. Cost is determined using the first in first out (FIFO) method. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity). Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Leaf tobacco inventory which has an operating cycle that exceeds 12 months is classified as a current asset, consistent with recognised industry practice. PROVISIONS A provision is recognised in the consolidated balance sheet when the Group has a legal or constructive obligation as a result of a past event, it is more likely than not that an outflow of resources will be required to settle that obligation, and a reliable estimate of the amount can be made. A provision for restructuring is recognised when the Group has approved a detailed formal restructuring plan, and the restructuring has either commenced or has been publicly announced, and it is more likely than not that the plan will be implemented, and the amount required to settle any obligations arising can be reliably estimated. Future operating losses are not provided for. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. RETIREMENT BENEFIT SCHEMES For defined benefit schemes, the amount recognised in the consolidated balance sheet is the difference between the present value of the defined benefit obligation at the balance sheet date and the fair value of the scheme assets to the extent that they are demonstrably recoverable either by refund or a reduction in future contributions. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash flows using interest rates of high quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension obligation. The service cost of providing retirement benefits to employees during the year is charged to operating profit. Past service costs are recognised immediately in operating profit, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time. All actuarial gains and losses, including differences between actual and expected returns on assets and differences that arise as a result of changes in actuarial assumptions, are recognised immediately in full in the statement of comprehensive income for the period in which they arise. An interest charge is made in the income statement by applying the rate used to discount the defined benefit obligations to the net defined benefit liability of the schemes. For defined contribution schemes, contributions are recognised as an employee benefit expense when they are due. SHARE-BASED PAYMENTS The Group applies the requirements of IFRS 2 Share-Based Payment Transactions to both equity-settled and cash-settled share-based employee compensation schemes. The majority of the Group s schemes are equity-settled. Equity-settled share-based payments are measured at fair value at the date of grant and are expensed over the vesting period, based on the number of instruments that are expected to vest. For plans where vesting conditions are based on total shareholder returns, the fair value at the date of grant reflects these conditions. Earnings per share and net revenue vesting conditions are reflected in the estimate of awards that will eventually vest. For cash-settled sharebased payments, a liability equal to the portion of the services received is recognised at its current fair value at each balance sheet date. Where applicable the Group recognises the impact of revisions to original estimates in the consolidated income statement, with a corresponding adjustment to equity for equity-settled schemes and current liabilities for cash-settled schemes. Fair values are measured using appropriate valuation models, taking into account the terms and conditions of the awards. The Group funds the purchase of shares to satisfy rights to shares arising under share-based employee compensation schemes. Shares acquired to satisfy those rights are held in Employee Share Ownership Trusts. On consolidation, these shares are accounted for as a deduction from equity attributable to owners of the parent. When the rights are exercised, equity is increased by the amount of any proceeds received by the Employee Share Ownership Trusts. TREASURY SHARES When the Company purchases its own equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes), is deducted on consolidation from equity attributable to owners of the parent until the shares are reissued or disposed of. When such shares are subsequently sold or reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, increases equity attributable to owners of the parent. When such shares are cancelled they are transferred to the capital redemption reserve. OVERVIEW STRATEGY PERFORMANCE GOVERNANCE FINANCIALS 87